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TAX EFFECTS

Case 16-5 Tax Effects of accounting changes and error correction; six situationsWilliam-Santana, Inc. is a manufacturer of high-tech industrial parts that was started in 1997 by two talented engineers with little business training. In 2011, the company was acquired by one of its major customers. As part of an internal audit, the following facts were discovered. The audit occurred during 2011 before any adjusting entries or closing entries were prepared. The income tax rate is 40% for all years.a. A five-year casualty insurance policy was purchased at the beginning of 209 for 35,000. The full amount was debited to insurance expense at the time.b. On December 31, 2010, merchandise inventory was overstated by 25,000 due to a mistake in the physical inventory count using the periodic inventory system.c. The company changed inventory cost methods to FIFO from LIFO at the end of 2011 for both financial statement and income tax purposes. The change will cause a 960,000 increase in the beginning inventory at January 1, 2010.d. At the end of 2010, the company failed to accrue 15,500 of sales commissions earned by employees during 2010. The expense was recorded when the commissions were paid in early 2011.e. At the beginning of 2009, the company purchased a machine at a cost of 720,000. Its useful life was estimated to be 10 years with no salvage value. The machine has been depreciated by the double-declining balance method. Its carrying amount on December 31, 2010, was 460,800. On January 1, 2011, the company changed to the straight-line method.f. Additional industrial robots were acquired at the beginning of 2008 and added to the company”s assembly process. The 1,000,000 cost of the equipment was inadvertently recorded as repair expense. Robots have 10-year useful lives and no material salvage value. The class of equipment is depreciated by the straight-line method for both financial reporting and income tax reporting.Required:For each situation1. Identify whether it represents an accounting change or an error. If an accounting changes, identify the type of change.2. Prepare any journal entry necessary as a direct result of the change or error correction as well as any adjusting entry for 2011 related to the situation described. Any tax effects should be adjusted for through the deferred tax liability account.3. Briefly describe any other steps that should be taken to appropriately report the situation.E 16-24 Balance sheet classificationAt December 31, DePaul Corporation had a 16 million balance in its deferred tax asset account and a 68 million balance in its deferred tax liability account. The balances were due to the following cumulative temporary differences:1. Estimated warranty expense, 15 million: expense recorded in the year of the sale; tax-deductible when paid (one year warranty).2. Depreciation expense, 120 million: straight “line in the income statement; MACRS on the tax return.3. Income from installment sales of properties, 50 million: income recorded in the year of the sale; taxable when received equally over the next five years.4. Bad debt expense, 25 million: allowance method for accounting; direct write-off for tax purposes.Required:Show how any deferred tax amounts should be classifies and reported in the December 31 balance sheet. The tax rate is 40%.E 16-25 multiple tax rates; balance sheet classificationCase Development began operations in December 2011. When property is sold on an installment basis, Case recognizes installment income for financial reporting purposes in the year of the sale. For tax purposes, installment income is reported by the installment method. 2011 installment income was 600,000 and will be collected over the next three years. Scheduled collections and enacted tax rates for 2012-2014 are as follows:2012 $150,000 30%2013 250,000 402014 200,000 40Pretax accounting income for 2011 was 810,000, which includes interest revenue of 10,000 from municipal bonds. The enacted tax rate for 2011 is 30%.Required:1. Assuming no differences between accounting income and taxable income other than those described above, prepare the appropriate journal entry to record Case”s 2011 income taxes.2. What is Case”s 2011 net income?3. How should the deferred tax amount be classified in a classified balance sheet?

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